MAKERERE

UNIVERSITY

COLLEGE OF BUSINESS AND MANAGEMENT SCIENCES (CoBAMS)

SCHOOL OF BUSINESS

CPA (U) TRAINING CENTRE

LECTURE NOTES PAPER 3: BUSINESS LAW

PREPARED BY MR ARINAITWE PETER

THE LAW OF PARTNERSHIP

Definition of Partnership The Partnership Act defines partnership as the relation which subsists between persons carrying on a business in common with a view of profit. This definition shows that a partnership exists only if: (a) (b) There is a business carried on. Act provides that business includes every trade, occupation or profession. The business is carried on in common. This means that the partners jointly participate in the running of the business. For this purpose each partner is regarded as an agent of the firm and his other partners for the purpose of business of partnership under the partnership Act. In Bairds Case James, L. J. stated that as between partners and the outside world (whatever may be their private arrangements between themselves) each partner is the unlimited agent of every other in every matter connected with the partnership business, or which he represents as partnership business, and not being in its nature beyond the scope of the partnership. The business is carried on with a view of profit. It is not necessary that a profit be actually made, but the business must be run with the object of making profit. This provision excludes charitable organizations and co-operatives.

(c)

Rules for Determining the Existence of a Partnership The Partnership Act lays down the rules for determining whether or not a partnership really exists. These rules are as follows: (a) Joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership, irrespective of whether the tenants or owners share any profits made by them. This is because no business is carried out. The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which the returns are derived. Technically, gross returns are not profits. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business. However, the receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make a person a partner in the business. In particular: 2

(b)

(c)

(i)

The receipt by a person of a debt or other liquidated amount by installments, or otherwise, out of the accruing profits of a business does not of itself make him a partner in the business or liable as such. This is so because he is a creditor. A contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits does not of itself make him a partner in the business or liable as such. This is because the person is an employee. A person, being the widow or child of a deceased partner and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such. The advance of money by way of loan to a person engaged, or about to engage, in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits arising from carrying on the business, does not of itself make the lender a partner with the person(s) carrying on the business or liable as such, provided that the contract is in writing, and signed by or on behalf of all the parties to it. This is so because he is a creditor. A person receiving by way of annuity or otherwise a portion of the profits of a business, in consideration of the sale by him of the goodwill of the business, is not by reason only of such receipt a partner in the business or liable as such. This is so because he is a seller of goodwill. Formation

(ii)

(iii)

(iv)

(v)

The Partnership Act does not prescribe rules for the formation of a partnership. Consequently, a partnership may be formed in any way. It is however prudent to reduce the agreement into writing. Capacity A person who is under the age of majority may be admitted to the benefits of partnership, but cannot be made personally liable for any obligation of the firm. The share of the minor in the property of the firm is however liable for the obligations of the firm. A corporation may enter into a contract of partnership provided such an act is not ultra vires the corporation. Such a partnership may be with an individual or with another corporation.

Illegal Partnership A partnership will be illegal in the following circumstances. (a) (b) If it is formed for an illegal purposes, such as a purpose which is contrary to public policy. Where it consists of more than twenty partners.

By virtue of the Companies Act provision which states that, no association consisting of more than twenty persons shall be formed for the purpose of carrying on a business with a view of profit unless it is registered as a company under the Act, or is formed in pursuance of some other Act of Parliament. In Fort Hall Bakery Supply Co v Wangoe (9) it was held that an association formed in breach of this provision is illegal and cannot be regarded as existing. The Firm Name Legally, the firm name is merely a convenient way of alluding to the partners as individuals. This is because the partnership does not exist as body corporate. But copyright can be registered in a firm name. Partners can, however, sue or be used in the firm name but they must appear in court in person. Every firm having a name which does not disclose the true surnames of all partners must have the name registered under the Registration of Business Names Act. In the case of such firms, the full names of all partners must be printed on every document issued by the firm. If any partner is not a Ugandan, his nationality must be shown. If he has been naturalized, his original nationality must be shown. Under the Registration of Business Names Act, the Registrar must be furnished with the following particulars. (a) Business name. (b) The general nature of the business. (c) The principal place of the business. (d) The present Christian name and surname and any former name and surname of each partner, and their usual residence. (e) The nationality of each partner. (f) Any other business occupation of the partners. (g) The date of the commencement of the business. Relationship between partners inter se

The relationship of the partners inter se will depend on the provisions of the Partnership Deed, or the Articles of Partnership, if any. The Articles of Partnership will generally contain the following clauses: (a) The nature of the business. (b) The capital and property of the firm and the capital contribution of each partner. (c) The sharing of profits and losses. (d) The rules as to interest on capital, or drawings. (e) Accounts and audit. (f) The powers of each partner. (g) The grounds for dissolution. (h) The method of determining the value of the goodwill on retirement or death. (i) The method of computing the amount payable to an outgoing or deceased partner. (j) The power of expulsion. (k) The arbitration clause. RIGHTS, DUTIES AND LIABILITIES OF PARTNERS The duties rights and liabilities of partners in the conduct and management of the affairs of the partnership are contained in the partnership deed; where they are not the Act applies. The Act lays down the basic duties of every partner and the said duties are not subject to any contract to the contrary. The duties of a partner include the following; 1. To carry on the business of the firm to the greatest common advantage of all partners generally. 2. To indemnify the firm from any loss caused due to his willful neglect in the conduct of the business of the firm 3. Every partner has a duty to account for any secret profits obtained by him. 4. A partner has a duty not to compete with the firm 5. Every partner is required in carrying out the business of the firm to be just and faithful. 6. A partner has a duty to render true accounts and full information of all the things affecting the firm.

7. Due diligence; a partner must exercise his duties carefully with honesty and skill 8. Provision of information; it is the duty of the partners to give full information about the affairs of the firm to each other and to keep each updated about partnership affairs. The Partnership Act provides that, subject to any agreement between the partners, the interests of partners in the partnership property and their rights and duties in relation to the partnership shall be as follows: (a) All the partners are entitled to share equally in the profits and capital of the business and must contribute equally towards the losses, whether of capital or otherwise sustained by the firm. Every partner must be indemnified by the firm in respect of payments made and personal liabilities incurred by him in the ordinary cause of the firms business or in respect of anything necessarily done for the preservation of the business or property of the firm. This is a partners right as an agent of the firm. Where a partner advances money to the firm for business purposes over and above the amount of his agreed capital, he is entitled to interest on the capital at the rate of 6% per annum from the date of payment or advance. A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him. Every partner may take part in the management of the partnership business. No partner is entitled to remuneration for acting in the partnership business. No person may be introduced as a partner without the consent of all existing partners. The reasons for this rule were given by James L. J., in Bairds case as follows: A partner who may not have a farthing of capital left may rake moneys or assets of the partnership to the value of millions, may bind the partners by contracts to any amounts, may give the partnership acceptances for any amount an may even as has been shown in many instances in this court involve his innocent partners in unlimited amounts for frauds which he has craftily concealed from them. That being the relation between the partners, of course, when the court had to consider whether a partner could substitute or let in another person for or with him, there could be no difficulty in saying that this could not be done without the consent of all the partners. (h) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners but no change may be made in the nature of the partnership business unless all the partners consent.

(b)

(c)

(d) (e) (f) (g)

(i)

The books of the partnership are to be kept at the place of business of the partnership (or the principal place, if there is more than one) and every partner may at all reasonable times have access to and inspect and copy any of them.

Partnership Property Partnership property is defined as all property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of partnership business. Such property must be held and applied by the parties exclusively and for the purposes of the partnership and in accordance with the partnership agreement. The Act further provides that, unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm. Authority of Partners The Partnership Act provides that every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner. Liability of Partners The Partnership Act provides that every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner. The section however provides that a person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner. The fact that a person is liable jointly with the other partners gives a creditor the following options. Firstly, he can proceed against the partners jointly i.e., in the firm name. if he obtains judgment against the firm, the debt must be satisfied out of the assets of the firm. If however, the assets of the firm are insufficient, then the creditor can look to the private assets of the partners in order to satisfy his debt. Secondly, the creditor can proceed against any individual partner. If he obtains judgment against a certain partner and his judgment cannot be satisfied out of the private property of that partner, then he cannot proceed against the remaining partners. The creditor must choose which course to pursue. If he pursues the second course, the partner against whom the judgment is obtained will be liable to pay the full amount. H has a right to call upon the other partners, however, to contribute the amounts which they should bear. Liability of retiring partners 7

The Partnership Act provides that a partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement. He may however be discharged from any existing liabilities by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors. The agreement may be either express or inferred as a fact from the course of dealings between the creditors and the firm as newly constituted. Death of a partner On the death of a partner, where the partnership is terminated by the event, the private property of the deceased is available to the creditors of the firm. First, however, the claims of the private creditors must be met out of the private property. Any surplus remaining goes to satisfy the debts of a partnership which remain unpaid.

Dissolution of Partnership
A partnership may be dissolved without a court order or by a court order. Dissolution without a court order A partnership may be dissolved without a court order under the Partnership Act: (a) if entered into for a fixed term, by the expiration of that term; (b) if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; (c) if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership, in which case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice; (d) if any partner dies or becomes bankrupt (unless the agreement between the partners provided otherwise); (e) if any partner permits his share of the partnership to be charged under the Partnership Act for his separate debt and the other partners opt for the dissolution of the firm, or (f) If an event happens which makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership

Dissolution by the court

A partnership may be dissolved by a court order made under the Partnership Act in any of the following cases. (a) When the partner is adjudged a lunatic, or is shown to the satisfaction of the court to be of permanently unsound mind. The application to the court may be made by any other partner or on behalf of the affected partner by his guardian ad litem or next friend or any person having title to intervene.

(b) When a partner, other than the partner suing, becomes in any other way permanently incapable of performing his part of the partnership contract.

(c) When a partner, other than the partner suing, has been guilty of any such conduct which, in the opinion of the court, regard being had to the nature of the business, is calculated to affect prejudicially the carrying on of the business.

(d) When a partner, other than the partner suing, willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him.

(e) When the business of partnership can only be carried on at a loss.

(f) Whenever in any case circumstances have arisen which, in the opinion of the court, render it just and equitable that the partnership be dissolved.

Dissolution under the just and equitable ground is illustrated by Re: Yenidje Tobacco Co in which the court made the order because the relationship between the two partners became so strained that they stopped speaking to each other. A state of mutual hostility or hatred is incompatible with partnership. Authority of partners The Partnership Act provides that after dissolution of partnership, the authority of each partner to bind the firm, and the other rights and obligations of the partners continue not withstanding the dissolution, so far as may be necessary to wind up the affairs of the 9

partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise. Application of property The application of partnership property on the dissolution of a partnership is governed by the Partnership Act which provides that every partner is entitled, as against the other partners in the firm and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm and the surplus assets applied in payment of what may be due from them as partners to the firm. The distribution of assets is usually done as follows: (a) In paying off all creditors of the firm who are not partners. (b) In paying off rateably any loans made by partners to the firm, such loans being distinguished from capital. (c) In paying rateably to the partners the amounts due to them in respect of capital. (d) If any surplus remains it is to be shared among the partners in the proportion in which they share profits. The rule in Garner v Murray Three partners, G. M and W, agreed to contribute in unequal proportions to the partnership capital and to share profits equally. There was a loss on realization, and, on the dissolution of the partnership, W, being insolvent, could not make good the deficiency on his capital account. It was held that G and M, before being paid rate ably what was due to them in respect of capital, must contribute the amount that was required to make good the deficiency of W, in proportion to the last agreed balance on their capital accounts. Limited Partnerships By virtue of the Limited Partnership Provisions, the liability of certain partners may be limited to a certain extent. The chief provisions of the Act are as follows: (a) The number of partners in a limited partnership is restricted to twenty. (b) There must be one, or more, general partners who are liable for all the debts and other liabilities of the firm.

(c) In addition to the general partner or partners, there will be one or more limited partners. Limited partners are persons who, at the time of joining the firm, bring in property taken at a certain value as capital, and are not liable for the debts and other liabilities of the firm beyond the amount of the contribution. This form of 10

limited liability has a different meaning from that which prevails in registered companies.

(d) A limited partner cannot, during the lifetime of the firm, withdraw or receive back from the firm his contribution or any part of it.

(e) The death or bankruptcy of a limited partner does not cause the dissolution of the partnership.

(f) The lunacy of a limited partner does not case the dissolution of a limited partnership, unless the share of that partner cannot be separated from the assets of the firm by any other method.

(g) A limited partner has no right to participate in the firms management. If he does he will be deemed to be a general partner with the consequent unlimited liability in respect of transactions that he engaged in.

The Partnership Act and the general rules of partnership law apply to a limited partnership, except where these do not agree with the Limited Partnership Act, in which case the rules laid down in the latter Act over-ride those laid down in the former.

11